It may sometimes seem like regulators and lawmakers hail from another planet, but in the end, both credit unions and the outside bodies that influence their fates want largely the same thing. The challenge is how to step up this dialogue and effectively communicate about important issues such as risk, reward, and the reality of the financial markets in which credit unions operate.
This is a topic that Hope Credit Union ($186.7M, Jackson, MS) knows well.
Originally founded as a church-based financial institution, Hope shares its founder and CEO Bill Bynum — not to mention the vast majority of its leadership, employees, resources, and even its long-term cooperative mission — with a community development financial institution called Hope Enterprise Corporation, which was created by Bynum and other leaders to support the local manufacturing industry and provide financing opportunities for underserved borrowers in the Delta region.
Since joining forces in 2002, these organizations have supported one another in countless ways. But a top priority of late has involved using the combined strengths and resources of these two distinct business models to more directly influence legislative and regulatory activities and begin dismantling some of the longstanding financial barriers faced by consumers at home and on the national stage.
In the following Q&A Bynum, joined by Hope CFO Richard Campbell and Chief Policy and Communications Officer Ed Sivak, shares some thoughts on how credit unions can begin to ramp up these efforts and, ultimately, get everyone speaking the same language.
Tell me about Hope credit union's appetite for growth? Where is that both an opportunity and a challenge?
Richard Campbell: A credit union our size serving a four state area is just a drop in the bucket, so there's much more growth we're looking to obtain from a balance sheet perspective. But we're still trying to grow that in what I would call a conservative way.
We have around $18 million in capital, of which about $15 million is secondary capital and $3 million is equity. Our secondary capital has come from multiple sources, including the New Market Tax Credits and, since 2010, the Community Development Capital Initiative (CDCI) which is a part of the Troubled Asset Relief Program (TARP). We're hoping to extend that beyond 2018 because it's not considered permanent capital, which can make regulators nervous.
There is some churn there so we have to show that we do have other ways to supplement that, they're just different from the ways you might see at a normal credit union.
How has the credit union's process for thinking about, preparing for, and in some cases embracing different types of risk changed over time?
RC: Our asset mix is a little different from a traditional credit union because most of our loans are not short-term consumer loans. In fact, that's the smallest area. The largest part of our portfolio is our 30-year fixed rate mortgages and the second is our medium term business loans.
We're comfortable with that because historically as an organization, we know business lending, and we also know there's a huge need for mortgage loans, so we're not going to stop doing these just because the secondary market has slowed down. Instead, we've learned how to absorb that risk.
Because our average mortgage size is around $80,000 and our losses there are under 50 basis points, it's not so much a credit risk we deal with but an interest rate risk.
We're not big enough to get into complicated derivatives to hedge that, and we can't originate mortgages at 3.75% for our higher risk borrowers because we're not really competing with other lenders at that point, so we do it at around 6% instead. That's a little high in today's market but for individuals who are getting a second chance or are just starting to build good borrowing history, it is considered a pretty good rate. The idea is not to make money off of them, but because we have to hold those types of loans on our own portfolio, we have to absorb that as straight risk through our pricing.
We're also borrowing from the Federal Home Loan Bank to better match that liability.
We're different because we don't grow only through our core membership but rather through individuals around the country who consider us as a mission investment. We have a lot of religious organizations, credit unions, and even banks that don't see Hope as a competitor but rather invest in us because they believe in what we do. So we started off with a very large amount of certificates of deposit in our portfolio of deposits and we were comfortable with that because we viewed it as a relationship deposit base rather than a brokered deposit base … it wasn't just rate shoppers. Now, within the last three to four years, we have seen CDs whittling down and being replaced by core deposits like savings and drafts.
From an asset quality standpoint, we do expect to have higher losses in some areas than other institutions, but we've also seen lower losses in key areas like our mortgage portfolio largely due to our underwriting.
Today, the loss rate on these loans is hovering right near 50 basis points, while consumer loans average less than a point. It's hard to gauge average losses in the business portfolio, as one loan going bad can have a huge impact, then you go a year without any going bad and have zero loss. But in all, we expect about a point loss for our business loans as well.
How do you set effective thresholds, while also ensuring that you're keeping the credit union on track with its core mission?
Bill Bynum: As credit unions, the regulatory environment influences greatly what we can and can't do, and it sometimes makes us feel like we are walking on eggshells. But we also need to pay close attention to where we are headed and whether or not it fits our original mission. Without that, we run the danger of moving too close to traditional banks.
Most of our members weren't shut out by financial institutions because they weren't a good credit risk, but because they didn't generate enough fee income or some other reason.
We know when to say no, but we don't just say "no" — we say "not yet." All of our investments in credit counseling and education as well as our technical assistance for businesses means more time spent up front but less time working out issues on the back end.
We don't put people into financial relationships that are going to blow up on them, and as a result, we can turn around and actually show that if you make these investments in the right way, these are the results you can get.
Once you've established a process that works and a threshold that you're comfortable with, how do you share that vision effectively with regulators and put their minds at ease?
RC: From our own merger experience, we know there are higher risk portfolios out there than ours and we've had both external and internal auditors as well as other regulatory parties who've been impressed with our underwriting and our levels of checks and balances. In fact, we've also started doing some consulting work for other institutions, which is a nice recognition that what we're doing does work and it also provides some additional non-interest income earnings for us outside of fees.
Rather than approaching our relationship with regulators as adversarial, like "Oh no, they're here again," we want to approach it as a friendship and a two-way street. If our model is unusual, it's our job to alleviate their nervousness. So we need to actually converse with them, ask them questions, guide them, and also help them guide us. You have to spend time on that relationship in advance, and that helps reduce the learning curve for everyone.
What's the importance of showing not just showing general activity in your data reporting, but also profiling who's being helped and why?
Ed Sivak: We've always been grounded in the importance of looking at data and using analysis to inform our decision making process. But there's also always been an emphasis from leadership that our data needs to demonstrate our impact.
In the late 90's, that prompted us to put in some pretty sophisticated impact-monitoring systems. By the 2000's, we were including that information in our Impact Reports, which are basically our annual reports but in a format that allows us to better communicate with those who have invested in Hope over the years.
It's not just about the number of loans that we make, but the opportunities that are generated for people as a result of these loans.
Now, we don't just count the number of small-business loans, we want to know the race and gender of the owners. We don't just want to know how many jobs are created at those businesses, but also the wages of those jobs and if they provide health benefits. We want to know how many of our mortgages allowed people to move from high poverty areas to low poverty ones.
For example, we discovered that roughly half of our commercial borrowers tried going somewhere else first and weren't able to get financing there.
Those are the types of stories that we look for in our numbers and we've integrated those goals into our annual work plan as well. Our commercial lenders now have targets for reaching out and making loans to minority — and women — owned businesses. They have targets for making loans in communities with high economic distress, and if we find that we're falling behind in an area, questions are asked and adjustments are made.
All told, we're looking at over $1.8 billion in financial investments that Hope has put out there and hundreds of thousands of people who have benefitted from our services or the organizations and business we serve. We're proud of that, but it's only through better tracking and sharing of our experiences that we can inform policy and achieve the full impact we're looking to make.
How else can credit unions seeking change better escape the echo chamber and get their voices heard at the state and national level?
ES: Right now we are working on the qualified mortgage rules, seeing what changes we need to make and what feedback and experiences we can forward up to the CFPB to ensure we can comply but also continue to effectively serve our membership base.
At the state level, we've also been very active in working with advocates to protect consumers from high-cost lenders and those that strip wealth out of low-income communities. It's critical we use every resource and ally we have there. With a stroke of a pen, policy makers can create a whole different environment and new opportunities that never even existed before.
BB: We've grown aggressively but we know we're still small compared to the need that exists. That's why we work so hard to influence the practices of larger institutions and inform public policy.
I really wish some of these larger institutions would do more, but it's all a matter of will. If the mega-banks suddenly decided they wanted to meet the needs of the underserved, they could do tremendous good for the country and do so profitability. But most of these organizations choose to spend their profits other ways.
As we grow, it's important to increase our capacity to partner with and influence public agencies at the local, state, and federal level to really multiply the impact of our work beyond the resources we currently have.
Through our previous partnerships, companies like our local utility provider have seen that they do better when people can earn enough to pay their utility bills. Wal-Mart does better when people have more money to shop. As credit unions, there's plenty of shared interest out there in our success, we just sometimes have trouble taking full advantage of it.
We were recently able to bring the Director of the Consumer Financial Protection Bureau into the Mississippi Delta for three days to meet with community-based consumer protection organizations here. It was extremely gratifying to have him sit down with residents who told him firsthand about the impacts of predatory lending and about their need for access to capital.
Before the Director left, he said he was not going to make another policy decision without thinking of the implications for people in places like Mississippi. It's important that decision makers understand that the financial realities of rural America are very different than they are in New York or Chicago or DC. We may not always be able to get the President of the United States or Congress to visit here, but we can provide them with clear evidence that making responsible policies and investments that ensure people have access to the financial tools they need to support their families, businesses, and communities is good for the economy and for the country. No one is better positioned to make this case than credit unions.